Tuesday, September 6, 2011

- Euro Crabs In A Bucket

The Swiss have pegged the Swiss Franc to the Euro at 1.2 and have committed to buy all the EUR necessary to maintain that peg. For me, this immediately conjured the image above.

The thing about crabs is that if you only have one crab in the bucket, you need a lid. If you have two, you might still need a lid if one is much larger than the other. But as soon as you put that third crab in, you can take the lid off because none of them will escape. If one makes some progress the others reach up and pull it back down.

The three Euro crabs are Germany, the easy spending Mediterranean countries, and now the Swiss.

The most interesting thing about this peg as far as I'm concerned is the fact that it raises the stakes for the German leadership. With a Swiss Franc pegged to the EUR, it becomes even more politically costly for Merkel et al to admit defeat and toss out the euro themselves. The odds of an independent DM have just fallen significantly in my opinion.

In essence this Swiss decision is a bet on the status quo of European politics. It's a bet that whatever the cost, euro integration will continue apace. But if you are someone like me who believes that the sort of integration required is probably impossible, then it also increases the odds that the people of Germany will require force to regain control over their government.

In effect, it's packing the lid on to Europe just a little tighter, and letting the political pressure build a little more. I think it's safe to say that the longer this goes, the less likely it will be settled without violence.

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